Equipment Leases – Capital Lease vs. Loan

By | September 25, 2014

Capital Lease as a Loan termsI’ve been talking about leases recently, and we’ll continue that today. But I wanted to answer a question I got via e-mail regarding leasing.

Here’s the question:

Hi Fletch,

In a recent blog, you talked about a $1 buyout lease and other Capital Leases, where at the end of the lease, the company then buys the equipment for $1 or some other sum. It seems to me that is similar to a loan (especially the $1 lease). So what’s the difference between that kind of lease and a straight equipment financing loan?

Dave F

Great question, Dave. The short answer is “not much difference at all”. But there are some technical differences.

In a lease, the lessor (the lender) actually owns the equipment in question. In other words, the lessor is seen as the purchaser on the bill of sale, and files a UCC filing to demonstrate such. However, on a finance deal / loan, the borrower actually owns the equipment, and the lender has a lien against the equipment until it is paid in full.

Remember selling your car years ago, and you had to have a “clear title” with no liens, and perhaps even a payoff letter from the company that loaned the money for the car? That’s a good example of how this works.

In some cases, a company wants to “own” the equipment, and wish to peruse a finance deal. Other companies might want the equipment off their balance sheet for a myriad of reasons (which I’ll get into further when I discuss the individual lease types in the next few posts), so they prefer a lease. It’s really up to the company accountant / CFO which one a company will ask for. The finance company has some say here, too – for example, many equipment finance companies don’t lease vehicles anymore, because of sticky situations involving ownership (like the traffic ticket I wrote about recently.)

In the old days, another advantage to the Lessee (borrower) of a Lease was the “owner” was responsible for taxes, upkeep, risks of ownership, etc. But today, all that has been contractually passed to the Lessee.

So realistically, there’s very little difference, as both accountants and the IRS treat a Capital Lease as a Loan in terms of taxes and risk. The only big difference is who “technically” owns the equipment during the time payments are being made, and for many companies, the answer is “it doesn’t really matter”.

 

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